This Electricity Market Change Could Cost Texans Billions and Pollute the Air

Last week, Governor Rick Perry's chief of staff Brandy Marty -- his newest appointee to the Public Utility Commission -- broke the deadlock between commissioners Donna Nelson and Ken Anderson over just how much intervention the electricity market needs right now. Both Nelson and Marty signaled their interest Friday in a "mandatory" reserve margin, or a set amount of generation capacity in the state. It wasn't made clear exactly how that margin would be enforced.

Nevertheless, analysts believe this is the long-expected first step toward a capacity market, a very un-free-market system in which load (that's you and me) subsidizes the operation and construction of power plants.

The differences between the two sound arcane, even semantical, and they could be. But if the financial services firm Barclays is right, the consequences will be made real to every Texan each time we get an electric bill. The projected cost to ratepayers has been pegged anywhere from a billion dollars to $5 billion per year. The devil will be in the details if and when it's hashed out.

Unfair Park reached out to commissioner Anderson, the odd man out here, and got him to expound on why he thinks "corporate welfare" is a bad deal for Texas.

At the root of his belief is a questioning of the entire premise: That the state is barreling toward electricity shortfalls and rolling outages. The belief is based on projections calculated by electrical grid-manager ERCOT, showing a thinning margin of safety between available electricity and consumer demand. When the latter outstrips the former, you get uncontrolled blackouts. But in its calculations, ERCOT often overstates demand and understates capacity. A number of factors, especially energy efficiency, are flat-lining energy consumption. Essentially, we don't know for certain this is a problem that requires an incredibly expensive solution.

"The old link between growth and non-farm employment and other economic activity and load growth has been severed," Anderson said. "[ERCOT] think[s] they have a better model. We won't see results until December."

Any action before then, he said, would be premature and destructive. A capacity market is the nuclear option in a deregulated system like Texas', where money is made and lost on the sale of electricity only. It would be a tacit admission that this system isn't creating reliability. Yet if you look to the last big blackout event in 2011, the lights went out not because we didn't have enough power plants, but because the ones we had did a poor job of weatherizing their equipment and got caught with their pants down in the middle of a cold snap. Even the hellish summer that followed didn't precipitate rolling outages.

Anderson believes that while the current system may not create fat reserve margins, it is efficient. "It encourages generators to keep their fleets well maintained and in service or they suffer financial consequences imposed on them by the market. It also encourages consumers to manage their consumption well."

The billions ratepayers would be forced to cough up, he said, would be better spent on "hardening" the distribution system (sticks and wires) where most outages originate anyway.

That much of the industry is heavily in favor of a capacity market doesn't surprise Anderson. "They want it because it's free money. It's money they don't have to work for. It's basically corporate welfare that's paid for with a giant energy tax on consumers, and i call it that because the cost is completely disconnected from the electricity they actually generate and that customers pay for," he said. "[Customers] are still going to pay for that. [Generators] are still going to expect to be paid for the energy they produce, but they want extra payments because it makes it easier to manage their portfolio.

"They're essentially making their problem the ratepayers' problem by shifting the risk onto ratepayers. The intent of going to a competitive market was to get away from that."

What's worse, if generators get their way, the increase in the cap electricity prices can hit during peak demand -- currently $4,500 per megawatt hour, and possibly double that in the future -- means they get to reap the generous reward of a deregulated system while receiving subsidies that eliminate all the risk. The result would be a summertime electric bill sending ratepayers into fits of spit-flecked apoplexy.

In the case of generators like Dallas-based Luminant, it isn't clear that they could build any new power plants. Under the deregulation bill, no single company can have more than 20 percent of the supply. It's supposed to prevent them from exerting price-distorting influence on the market. The former TXU has 19 percent already. A capacity market would encourage Luminant to keep its aging coal-fired power plants running.

"You'd be keeping older plants in service longer and what you'd see first is a bunch of old stuff coming out of mothballs, which is less efficient, more expensive and dirtier," Anderson said. "The experience in markets that have capacity payments is that it subsidizes older and dirtier plants."

Much about this remains to be decided. Anderson isn't convinced that Marty was unequivocally endorsing a capacity market. But a Barclays analyst reads it as a crucial first step, and a potential investment opportunity, guaranteed not by the vibrancy of the deregulated market, but by you and me.

"This supports our view that Texas is the only power market that supports investment," the analyst wrote.